Law and Employment Lessons from Latin America and the Caribbean
edited by James J. Heckman and Carmen Pages
University of Chicago Press, 2004
Cloth: 978-0-226-32282-7 | Electronic: 978-0-226-32285-8
DOI: 10.7208/chicago/9780226322858.001.0001


Law and Employment analyzes the effects of regulation and deregulation on Latin American labor markets and presents empirically grounded studies of the costs of regulation.

Numerous labor regulations that were introduced or reformed in Latin America in the past thirty years have had important economic consequences. Nobel Prize-winning economist James J. Heckman and Carmen Pagés document the behavior of firms attempting to stay in business and be competitive while facing the high costs of complying with these labor laws. They challenge the prevailing view that labor market regulations affect only the distribution of labor incomes and have little or no impact on efficiency or the performance of labor markets. Using new micro-evidence, this volume shows that labor regulations reduce labor market turnover rates and flexibility, promote inequality, and discriminate against marginal workers.

Along with in-depth studies of Colombia, Peru, Brazil, Argentina, Chile, Uruguay, Jamaica, and Trinidad, Law and Employment provides comparative analysis of Latin American economies against a range of European countries and the United States. The book breaks new ground by quantifying not only the cost of regulation in Latin America, the Caribbean, and in the OECD, but also the broader impact of this regulation.


James J. Heckman is the Henry Schultz Distinguished Service Professor of Economics and of Social Sciences and director of the Economic Research Center and the Center for Social Program Evaluation at the University of Chicago, and a research associate of the National Bureau of Economic Research. He was awarded the Nobel Prize in Economics in 2000. Carmen Pagés is a senior research economist in the research department of the Inter-American Development Bank.



- James J. Heckman, Carmen Pagés
DOI: 10.7208/chicago/9780226322858.003.0001
[labor market, Latin America, Caribbean, OECD standards, labor demand functions, market regulation]
This book uses microdata from diverse Latin American and Caribbean countries to investigate the impact of regulation on their labor markets. Common methodologies are applied to extract empirical regularities from the region. Latin America and the Caribbean are of interest in their own right. But for several reasons, the lessons learned from studies of these labor markets have much greater generality. The shifts in the policy regimes experienced in the region are dramatic by the Organization for Economic Cooperation and Development (OECD) standards, and many of these regime shifts are exogenous. This large and exogenous variation provides identifying power not available to analysts studying regulation in Europe and North America. Given the evidence on the comparability of labor demand functions around the world, lessons about the impact of regulation learned from Latin American labor markets apply more generally. (pages 1 - 108)
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- William F. Maloney, Jairo Nuñez Mendez
DOI: 10.7208/chicago/9780226322858.003.0002
[minimum wages, Latin America, wage distribution, informal sector, employment data, Colombia]
This chapter first provides an overview of the levels of minimum wages in Latin America and their true impact on the distribution of wages using both numerical measures and kernel density plots for eight countries (Argentina, Bolivia, Brazil, Chile, Colombia, Honduras, Mexico, and Uruguay). In particular, it attempts to identify effects higher in the wage distribution and in the unregulated or “informal” sector. The central message is that the minimum wage has impacts on wage setting far beyond those usually contemplated and likely beyond those found in the industrialized countries. The final section then employs panel employment data from Colombia, a country where minimum wages seem high and very binding, to quantify these effects and their impact on employment. (pages 109 - 130)
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- Jaime Saavedra, Máximo Torero
DOI: 10.7208/chicago/9780226322858.003.0003
[labor market reforms, labor demand, market turnover, Peru, worker behavior, severance payments]
This chapter analyzes the legal context regarding the probationary period, severance payments, nonwage costs, and temporary contracts, all factors that affect firm and worker behavior. It also describes changes in employment in Metropolitan Lima during the period of analysis and discusses how informality and temporary contracts have been mechanisms through which firms avoid paying mandated benefits and firing costs. The chapter presents results of labor demand estimations at both the sectoral and firm levels. Finally, it analyzes basic patterns of employment duration. In order to assess possible impacts of labor laws, the chapter compares patterns of the self-employed with those of wage earners in the formal and informal sectors. It presents a comparison of job duration among different groups of workers using empirical hazards, and shows the results of exponential hazards functions. (pages 131 - 182)
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- Adriana D. Kugler
DOI: 10.7208/chicago/9780226322858.003.0004
[firing costs, unemployment, job security regulation, Colombian labor market, market reforms, informal sector, legislation]
This chapter considers the incidence of a substantial reduction of firing costs on flexibility and unemployment in a less-developed country. In particular, the chapter studies the impact of the Colombian labor market reform of 1990, which reduced severance payments substantially, on worker flows into and out of unemployment and its implied net effect on unemployment. The chapter uses a micro-level data set from Colombia to examine the effects of a reduction in firing costs on worker turnover. The labor market reform introduced in Colombia in 1990 reduced severance payments for all workers hired after 1990 and covered by the legislation (formal-sector workers). Informal workers, who were not covered by the legislation, were not directly affected by the reform and, thus, are used here as a comparison group in the estimations. The empirical analysis exploits this variability in the coverage of the legislation between formal- and informal-sector workers together with the temporal change in the Colombian legislation to identify the effects of a reduction in firing costs on the exit rates out of employment and out of unemployment. (pages 183 - 228)
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- Mauricio Cárdenas, Raquel Bernal
DOI: 10.7208/chicago/9780226322858.003.0005
[labor demand, Colombia, severance payments, nonwage labor costs, labor legislation, payroll taxation]
Under the old system, employers managed the funds, and employees were allowed to make partial withdrawals at any time. At the time of separation, those withdrawals were debited in nominal terms, adding to the costs faced by employers. In practice, the new system implied a reduction in the level and uncertainty of severance payments for firms. In fact, the initial effect of the reform was to lower nonwage labor costs to 42.9 percent of the basic wage, down from 47.1 percent during the late 1980s. However, the reform did not deal with other important areas of labor legislation, especially payroll taxation. The reform package also included a social security law, enacted in 1993, which raised employers' mandatory contributions for health and pension programs. From the viewpoint of the labor market, this reform had important implications resulting from the significant increase in nonwage labor costs. This chapter analyzes the combined effect of these two reforms on labor demand. (pages 229 - 272)
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- Ricardo Paes De Barros, Carlos Henrique Corseuil
DOI: 10.7208/chicago/9780226322858.003.0006
[labor market regulation, labor market performance, Brazilian labor market, labor force, labor costs, welfare]
Labor market regulations are invariably introduced with two objectives. The first one is to improve the welfare of the labor force, even at the cost of introducing some degree of economic inefficiency. The second consists of improving efficiency, when external factors and/or other labor market imperfections are present. The first section of this chapter briefly describes the 1988 constitutional change, with special emphasis on the topics related to labor costs, which, basically, will be used as the main sources of variation on labor market regulations. The two sections that follow the institutional analysis focus on the two alternative measures of labor market performance. The next section is dedicated to the description and implementation of the regression analysis through which to estimate the parameters of labor demand. Section 5.4 contains the description and results achieved when turnover rates are used to measure labor market performance according to difference-in-differences methodology complemented by regression analysis. Finally, the last section summarizes the main findings. (pages 273 - 350)
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- Guillermo Mondino, Silvia Montoya
DOI: 10.7208/chicago/9780226322858.003.0007
[labor market regulation, employment decision, job rights, unemployment, Argentina, labor demand estimation]
In Argentina, workers have historically enjoyed strong job rights (including a right to advanced layoff notice and to severance payments). During the 1990s, and following the rapid growth in unemployment, these regulations came under attack. This chapter provides some evidence on these issues. It exploits a panel data set that covers over 1,300 manufacturing firms for the period 1990–1996. The panel provides information on employment and hours worked, as well as overtime, wages, and physical production. The next section presents some selected institutional features of Argentina's labor market that focus on job security regulations and payroll taxes. The next section considers two important descriptive issues: Who benefits from regulations, and how much do they cost? The evidence is based on Permanent Household Survey (PHS) microdata and identifies the effects on individuals' labor market outcomes stemming from varying regulations. The firm-level dynamic labor demand estimation is also looked into. The chapter then documents the dynamic responsiveness of employment and hours to changes in output and labor costs at the firm level. The last section concludes. (pages 351 - 400)
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- Claudio E. Montenegro, Carmen Pagés
DOI: 10.7208/chicago/9780226322858.003.0008
[labor market policies, Chile, minimum wages, job security provisions, employment rates, time series methods]
This chapter takes advantage of the unusual variance in labor market policies in Chile to examine how minimum wages and job security provisions affect different types of workers. It looks at the effects of regulations on the distribution of employment by age, and also, by skill, which has not been examined before. To this effect, the chapter uses a sample of repeated household surveys spanning the period 1960–1998 and several measures of labor market regulations across time. It makes use of cross-section and time series methods to estimate the effect that these policies have on the distribution of employment and on particular subgroups' employment rates. To assess whether the estimates are reflecting the effect of regulations instead of the effect of some unobservable correlates, the chapter also estimates the effect of labor policy on sectors not covered by regulations. (pages 401 - 434)
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- Adriana Cassoni, Steven G. Allen, Gaston J. Labadie
DOI: 10.7208/chicago/9780226322858.003.0009
[employment adjustment, unionization, manufacturing industries, Uruguay, regime change, trade policy]
For the same establishment or individual with and without union status, does employment adjustment to changes in wages and output vary when the firm is unionized and when it is not? How long does it take to complete the adjustment in these two settings? This chapter examines these issues directly, using evidence from manufacturing industries in Uruguay from 1975 through 1997. Uruguay is well suited for such a study because the economy has gone through a series of regime changes. A military government took over in 1973 and stayed in power through to 1984. During and after this regime, there were significant changes in labor and trade policy that allows for the identification of the impact of these policies on labor demand parameters. (pages 435 - 495)
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- Hugo A. Hopenhayn
DOI: 10.7208/chicago/9780226322858.003.0010
[labor market policies, employment duration, labor market reforms, Argentina, economic policy, unemployment rate]
Over the last few years, the debate on labor market reform has been at the center of economic policy debate in Argentina. This debate has been fueled by the sustained growth in the unemployment rate observed during the decade. One of the major targets of the attack on labor market regulation has been high dismissal costs. Attempts to reduce dismissal costs for all existing jobs have faced strong opposition. As a compromise, and to stimulate job creation, employment promotion contracts for new jobs were introduced in 1995. These contracts were limited to a fixed term ranging from three months to two years. It is a standard view that the reform stimulated the creation of a large number of these temporary contracts, which currently dominate the flow of new jobs. However, there is now a growing concern about the volatility of these temporary jobs, referred to as junk contracts, and a predominant view that they tend to generate excessive turnover. This chapter studies the effect of this reform on job duration. (pages 497 - 516)
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- Andrew S. Downes, Nlandu Mamingi, Rose-marie Belle Antoine
DOI: 10.7208/chicago/9780226322858.003.0011
[labor market regulation, Caribbean, worker welfare, economic condition, collective bargaining, labor demand function]
The challenge for policymakers is to design a regulatory system that minimizes the additional labor (i.e., adjustment) costs to employers while protecting the socioeconomic welfare of workers in the labor market. By minimizing such labor costs, employers would be in a better position to hire more workers given other favorable economic conditions. This chapter outlines the institutional framework governing the operation of the labor market. The nonwage cost implications of this framework are then examined. An attempt is made to develop indexes of labor market regulation based on the various provisions in labor regulation and, to a lesser extent, in collective bargaining agreements. The incorporation of nonwage labor costs into the labor demand function is also examined. The statistical data used in the estimation process are examined, too, while the empirical results are also presented. The possible policy implications of the research are given in a closing section. (pages 517 - 552)
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- Daniel S. Hamermesh
DOI: 10.7208/chicago/9780226322858.003.0012
[labor demand, Latin America, Caribbean, labor market, research design, labor costs, employment level]
No single study of an economic phenomenon, or even several studies, is ever highly convincing, because one can worry about the representativeness of the example and particular problems with the research design. The results of recent Latin American and Caribbean studies, however, based as they are on labor markets that have not been thoroughly examined using modern econometric techniques and that have been characterized by relatively large shocks, should reinforce our confidence about the negative impact on employment of higher labor costs, both payroll costs and job market regulations. They should remind policymakers that in developing economies, as in developed ones, policies that may be socially desirable, but that raise labor costs or increase labor market rigidity, have negative consequences for the level of employment. (pages 553 - 562)
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Author Index

Subject Index